Starting a business can become challenging, especially if this is your first time doing so. Aside from outlining your business plan, you also have to think about what type of business organization you are going to pursue and what your corporate formation documents will look like. After all, there are quite a few choices!
Once you boil it down, there are three types: sole proprietorship, partnership, and corporation. The type you choose depends on several factors such as the number of owners, capital, liability, life, regulation, and management of your business. If you are planning to start a corporation, then keep on reading! We are going to give you lots of information on the basics of corporations and corporate formation documents so you can start taking the business world by storm.
Basics of a Corporation
Perhaps what most differentiates a corporation from the other two types of business organizations is that it is authorized and recognized by the law as a single entity. That is, a corporation can be sued as a legal entity different from its owners and managers. This protects the owners and managers from personal disaster even in the face of business collapse.
Let’s take a look at some of the other decisions you’ll need to make as you form your corporation.
Number of Owners
The only rule of thumb is that there should at least be one owner. Generally, the number of owners in a corporation is unlimited, with the exception of one type of corporation owning another type of corporation. If the company is traded in the stock market, traders and investors can buy a stock of that company and can claim to be an owner (in this case is more known as a shareholder).
The capital of a corporation is limited to the available resources. However, since the number of owners is unlimited, the capital of a corporation can, at some point, be considered as effectively unlimited. This is due to the fact that, once it is established, the company can issue stocks and sell them to the public for trading.
While the owners of sole proprietorship and partnership have unlimited personal liability, the liability of the owners of a corporation is only limited to their investment. In other words, if the company goes bankrupt, the loss of the shareholder is only equal to the amount they invested. They are not held personally liable.
Different countries and states have different regulations of a corporation. In the US, a company can exist for 50 years from its incorporation date. The good thing is that the lifespan of a corporation can simply be renewed after the term is up.
Aside from being a legal entity, what differentiates a corporation from the two business organizations? Put simply, there is a separation between ownership and management. Owners are those who own stocks/shares of the company; they compose the board of directors. Meanwhile, management is composed of people who are entrusted to perform the operations of the company.
Forming a Corporation
Starting your new business entity requires tons of paperwork, starting with your corporate formation documents. The good thing is that you can absolutely do a DIY California Incorporation. You just need to declare a registered agent, as every business in California is required to have one.
While it is possible to go at it solo, we highly encourage you to seek legal assistance along the way. That doesn’t necessarily mean hiring an expensive lawyer; there are legal document assistant services that offer incorporation services for far cheaper. Services like A People’s Choice are safer and more secure than running the risk of committing errors in your corportate formation documents that may cost you a lot later.
Importance of Incorporating
There are plenty of businesses that started as either a sole proprietorship or partnership and eventually converted into a corporation with proper corporate formation documents. This is primarily because of the greater benefits that incorporating a business gives, including the following.
- Separate Legal Identity
As mentioned earlier, a corporation is treated legally as a person. This is mostly beneficial if a case is filed against the corporation. In this example, the corporation itself issued, but the suit does not extend to the corporation’s owners.
- Tax Advantages
The tax rate for corporations is lower than it is for individuals and partners. Furthermore, your corporation gets to enjoy tax cuts that eventually reduce your overall tax liability.
- Asset Protection
The corporation as a separate legal identity is responsible for its own liabilities. Like any legal troubles, these debts do not extend to the owners. Owners of the corporation are held liable only to the extent of their investment. That is, your personal assets as an owner are safe should your company have remaining debts after liquidation.
Aside from that, incorporating instantly gives the public an assurance that your business is credible and legitimate. If you want to do business, this image may be crucial to your success.
Corporate Formation Documents
There are requirements that you must comply with should you want to incorporate your business. Here are the three most important things you should take note of as you prepare to hit the paper and create your corporate formation documents.
Name of Your Corporation
If you don’t have a name yet, it’s time to start brainstorming. This will be the main identity of your business, so it’s an important decision. In thinking of a name, make sure it’s not misleading or in any way similar to other California corporations registered in the California Secretary of State (for example, don’t try to name your company “Goggle” if you don’t want trouble). Aside from that, you are not required to include words such as “Incorporated,” “Corporation,” or “Limited” in the name of your corporation.
Upon finalizing, you may also want to first check the availability of your proposed business name. You can use an online name check service or mail a Name Availability Inquiry Letter to the office of California Secretary of State to do this. Finally, you may reserve the name of your corporation for 60 days by filing a Name Reservation Request Form with the same addressee.
Articles of Incorporation
When you have chosen at least one director and a registered agent, it’s time to file for the articles of incorporation. In this document, you declare the following information:
- Corporate Name and Business Address
- Type of Corporation
- Information about the Registered Agent
- Number of Stocks Authorized to be Issued
- Corporate Purpose
Bylaws outline how the corporation will operate. This usually includes internal rules and regulations about the responsibilities of owners, selection process of managers, and meeting decorum. While this is not required, having corporate bylaws give your business a sense of credibility and legitimacy, especially for lending purposes. It also provides a structure for how you’ll do things as a business.
Corporate Formation Documents FAQs
We’ve already tackled the ABCs of corporations, the ways in how you can incorporate your business, the importance of forming a corporation, and the must-haves in corporate formation documents. However, there’s a lot more to learn about the sometimes complex subject of corporations and corporate formation documents. To supplement the details mentioned above, here are some frequently asked questions California residents have about corporate formation:
How much will I spend if I incorporate my business?
The cost typically varies depending on factors such as the incorporation method and the type of corporation. But to give you a good estimate, if you choose a document assistant service like A People’s Choice, you can start your new business entity for as low as $275 excluding state filing fees. The package already includes the preparation and processing of the articles of incorporation, bylaws and minutes, two non-issued stock certificates, and a selection of forms per public service booklet.
What is a limited liability corporation?
Popularly known as LLC, a limited liability corporation is a hybrid business organization that combines the advantages of both the partnership and corporation. Under this type, a company has a partnership feature of flow-through taxation to the members of the LLC, meaning no one pays taxes twice. Meanwhile, the personal assets of the owners of the company are protected, since the liabilities of the company are limited to what the owners invest.
What is the difference between a limited liability partnership and a limited partnership, and how do they relate or differ from a corporation?
A limited liability partnership (LLP) is most often used by professionals like doctors, lawyers, and accountants. Just like in a corporation, the owners of the business are not liable to the liabilities of the actions of the other owners. For instance, when a doctor who co-owns the business had malpractice of profession, a case file against them does not extend to the business, nor to the co-owners.
A limited partnership, on the other hand, is composed of two or more partners. These partners are classified as either a general partner or a limited partner. The former is tasked with running the business and has unlimited liability, while a limited partner does not participate in the management. The limited partner’s liability is only limited to the amount of their investment.
Can I prepare corporate formation documents online?
Luckily, yes! Creating your business entity is now hassle-free thanks to the advancement of technology. If you are setting up a corporation in California, we at A People’s Choice can help you in just three simple steps.
First, you complete a simple 10-minute questionnaire. After that, you review your information and confirm your services. Lastly, securely sign online, and we will do the rest for you! What’s also good is that we do not require payment until you are ready to hire us.
Taking the First Step to Form your Corporation
It is normal to get nervous when you are establishing your business entity for the first time. But do not worry because, with A People’s Choice, we assure you a convenient and affordable option to do the paperwork for you!
Safeguard your assets and lower your taxes by taking care of your corporate formation documents now. For inquiries and further questions, do not hesitate to give us a call at 800-747-2780. We will be more than willing to assist you in preparing your corporate formation documents so your business can get going as soon as possible.
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